New parents and experienced parents alike all stress over a few of the same things – the health of their children, the stability they can offer them and probably how they will be able to pay for their college costs when the time comes. While many aspects of being a parent are out of your control, saving for your child’s future does not have to be one of them.
You should make sure to explore the many ways to put away money for your children’s future educational needs that suit your household’s budget goals. Once you have decided how much money you can dedicate on a regular basis towards your child’s education fund, you will need to decide how you would like to manage this money before college time comes. There are multiple options for housing these funds in specific types of financial accounts, and some accounts may even be able to add additional value to the funds you deposit.
How much should I save?
In 2018, the average cost of receiving a degree from a four-year private university was $167,000. Analysts expect that average to increase to $303,000 in less than 20 years.
Attending Harvard in that same period will probably cost almost $500,000. Starting to budget for your child’s education early may be the best way to guarantee that you will have enough funds to support their tertiary studies. Of course, it is impossible to predict exactly how much your child will need for their studies when the time comes, but there are a few useful strategies that you can use to decide how much you need save, regardless of where your child may choose to study in the future.
The 2K Rule
Analysts at Fidelity Investments have recommended deciding how much to put away for your children’s university education by using the “2K Rule”. According to the 2K Rule, parents should multiply their child’s age by $2,000 to know about how much they should have set aside at that point in time. This estimated amount can help parents to be able to rest easy that they will be able to cover about half the cost of a public university in the future. So if you are following the 2K Rule for your 10-year-old child, you ideally would already have about $20,000 put away towards future education costs or should be working towards that goal. Ideally, the rest of the necessary funds would come from a combination of scholarships or financial aid, loans and regular payments from current income.
Fidelity created this rule to guide parents who, when surveyed, expressed a desire for a basic guideline when it came to deciding how much to save for future university costs. Although this strategy may not work for parents who expect their children to attend private school, it can nonetheless give you an idea of where to start saving for school. This strategy was mostly created for families who plan to take advantage of a 529-college savings plan.
The Rule of Thirds
Another popular way to decide how much to save for your children’s college fund is the “rule of thirds.” Favored by many college funding experts, the rule of thirds directs parents to try to put away one-third of the current cost of college beforehand, pay for one-third out of pocket when the time comes and pay the final third with finance options like loans or grants. Using this strategy may require parents to have a clearer idea of what their child’s total university costs are expected to be for proper planning. So, a family who hopes for their ten-year-old child to attend their state university, they may want to look at not only the current price of their state university but also its expected costs in eight years’ time.
Whatever strategy your family chooses for determining your college savings goals, it will be easier to follow if you plan for it. That may mean setting up an automatic withdrawal from your checking account into a dedicated college savings account or it could mean writing a post-it on your refrigerator reminding you to put your spare change in the education fund.
Savings Options
Once you have decided to put away a certain monetary amount on a regular basis towards your child’s future, you need to think about what is the most lucrative way to save those funds until your child will need them. Luckily, there are a few popular options for parents looking to make the most of their education savings, including the oft recommended 529 College Savings Plan, various state prepaid tuition plans and monetary gifts that qualify under the Uniform Gift To Minors Act (UGMA) or Uniform Transfer To Minors Act (UTMA).
- 529 college savings plans are one of the most highly recommended ways to save for your child’s future educational needs. A 529 Savings Plans is a state-run investment funds that allow parents, grandparents or other interested family members to begin making tax-deductible payments in a child’s name. Funds in this account can be used for all university related costs including tuition, housing, books and more. These accounts can be opened in your state of residence or another state, though only residents of Arizona, Kansas, Maine, Missouri and Pennsylvania can claim tax deductions for 529 saving plans purchased. The exact amount that you can deposit for a tax deduction varies by state and by program, as do the methods in which these funds are invested. A 529 savings plan operates similarly to retirement plans, in that assets are invested by a managing company into a variety of financial options like stocks, bonds and securities. Some 529 college saving plans require participants to make regular deposits of a certain amount or to maintain a certain amount in the account at all kinds. Interested parents should look closely at the fees associated with their chosen 529 college savings plan.
- Prepaid college tuition plans are another popular way to save for a child’s future education costs. Unfortunately, not all states offer prepaid tuition plans so you should look for information specifically on your state before deciding how to proceed. When available, parents can invest in a prepaid college tuition plan in much the same way as a 529 college savings plan. Parents can make tax-deductible contributions to the account up to a certain annual limit. The difference between a 529 savings plan and prepaid tuition savings program is that for the latter, parents lock in a predetermined tuition price that they work towards paying off while the former only saves the money for later use. In theory, parents opting for state prepaid tuition plans save by making tax-free contributions to the account and by locking in a tuition price at a rate that is sure to be lower than that of the future.
- Uniform Gift To Minors Act (UGMA) or Uniform Transfer To Minors Act (UTMA) are excellent choices for some families. By making a UGMA or UTMA, an adult can create a trust and name a child as a beneficiary to be able to tax any funds in the dedicated account at the child’s tax rate. Even more, money stored in these funds can be used for any purpose once the child becomes 18 or 21 without any restrictions for using it towards education costs. Unlike with some of the above mentioned options, the beneficiary of a UGMA or UTMA cannot be changed once the child reaches the age of access.
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